It is common to hear claims that crypto trading and forex trading are the same things because they both need the internet to carry out trading activities. Though they may bear some similarities, they are still worlds apart- both of them involve speculation of some sort. This piece would help demystify certain myths unconsciously thought pertaining to cryptocurrency and forex.
Crypto Trading: What is it?
Speculating the rise and fall of the value of a cryptocurrency is crypto trading. It is usually done using a crypto exchange(centralized or decentralized) platform. Another means that traders carry out trading activities is through derivatives, which allows them to speculate the value of crypto in the future, without them owning any of that crypto. For those that opt for derivatives trading, they have to deposit a small number of funds, which is called margin, before they can play in the market.
Forex Trading: What is it?
Forex trading is done by participants with different aims and game plans. For some, they are involved in the forex market to hedge their potential payments or receipts in foreign currency against fluctuations that could affect them negatively. This is common in brands that carry out international transactions. It is common to see them use hedging tools like options, futures, and forward contracts to reduce their risks.
On the other side of the market, are those that want to make a profit from the market, and may not be interested in hedging any financial or foreign exchange risks.
A forex market is a market filled with participants that exchange currencies at a specified amount. As a zero-sum market, there is always a set of participants that gain, while the other side loses.
Similarities Between Forex And Crypto Trading
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Both are traded online
Traders need the internet before they can trade different packages on crypto trading platforms. Whether it is a centralized or decentralized exchange, the trader has to be connected to a fast bandwidth internet service to capture tiny changes in the value of their crypto pairs and make rational decisions in real-time. Some traders splurge on innovative AI systems to make the decisions for them in split seconds. The same thing happens in the forex world. A second can determine if a forex trader smiles at the bank or crashes and burns. The tools an astute forex trader needs are the internet to work efficiently.
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Both Forex and Crypto markets have similar price determinants.
Since the crypto world doesn’t have a centralized body that determines what happens, the values of cryptocurrencies are determined by the invisible hands of demand and supply. The price that is pegged to a crypto coin, is determined by the volume of supply and demand of that coin. If more people are flooding the market with the said coin, the price will crash and vice versa. News of an event can increase or reduce the value of that cryptocurrency. A popular example was when the Chinese government began its campaign against Bitcoin miners in the country. That action alone affected the value of Bitcoin, forcing it to reduce drastically, making it spill over to the values of altcoins.
A similar thing occurs in the forex market. There is no centralized organization that determines the value of foreign currencies that are being traded or exchanged globally. The value of a trading pair is determined largely by demand and supply, though news of an event can affect it to an extent. Some countries may try to determine the value of their home currency against foreign currencies through policies, which may lead to a fixed exchange rate. This is effective mainly on paper because the invisible forces of demand and supply usually win at the end.
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Understanding of the markets
Before a trader can survive in either the Forex or crypto market, they need to have a good understanding of the market mechanics. Jumping into an investment pair or tool without doing thorough research could lead the trader into a pile of debt and loss. They need to know when to buy, sell or hold. Both markets have different investment packages like derivatives that can be traded, and it is important for a trader to understand them. They need to know their features, similarities, and peculiarities. A great aspect is that these markets tend to have a community of experts that share their knowledge with others for free or with a fee attached.
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Legality
Countries view cryptos differently. Some governments feel that crypto needs to be regulated, and they have come with some regulations to that effect. An example is the United States. Countries like Algeria have outrightly banned anything that has to do with cryptocurrency, including crypto trading. In the Financial Law of Algeria, according to the Journal Officiel, it states:
“The purchase, sale, use, and possession of so-called virtual currency are prohibited. A virtual currency is one used by Internet users over the Internet. It is characterized by the absence of physical support such as coins, paper money, or payments by check or credit card. Any violation of this provision is punishable in accordance with the laws and regulations in force.”
Some countries are not bothered with their citizens getting involved in Forex trading. On the other hand, countries like Bosnia Herzegovina, and Pakistan have banned this form of trading.
Differences Between Crypto And Forex Trading
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Volatile effect
Controlling or hedging risks is common in Forex markets, and that is why several tools make this possible. The level of volatility is lower than what is obtainable in the crypto market.
2021 has been a wild year for the value of cryptos. The year has seen a bull run and a bear market. For instance, Bitcoin skyrocketed to over $60,000 and plummeted when the Chinese government started its campaign against miners within its territory. This level of volatility tends to scare off traders that are used to traditional investments that permit them to hedge their risks.
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Tradable Instruments
There are thousands of cryptocurrencies in existence, thereby giving crypto traders access to numerous trading pairs. Since the number of cryptos increases regularly, a trader can easily explore them and make a killing by speculating their prices. Some traders seek out these new tokens, buy them when they are dirt cheap, then sell them off once the hype surrounding them has increased. They can do this over and over again because new cryptos enter the market regularly.
This can’t be obtainable in the forex market. Traders tend to focus on major currency pairs like USD/CAD, EUR/USD, USD/CNY, and so on.
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The level of liquidity
Cryptocurrency is not as liquid as one would expect. According to Coinmarketcap, the total market cap of the crypto market is $2.03T.
PoS blockchains that promote staking to improve their levels of security tend to lock liquidity with that activity. When a holder stakes their cryptocurrency, it is locked, meaning that the token can’t be accessed or used throughout that staking period. The likes of StaFi are changing this scenario by injecting more liquidity into the crypto market through the introduction of rTokens. Instead of staked tokens being removed entirely from circulation, StaFi creates rTokens to replace them and their holders can carry out trades, and other DeFi activities. Though this innovation is already in the crypto world, it is still new and has little impact on improving the liquidity scenario.
On the other hand, the Forex market is extremely liquid. It has a volume of $6.6 trillion daily. As a result of its high level of liquidity, traders do not have to worry about large slippage levels.
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Anonymous Transactions
When crypto started, it piggybacked on the anonymity concept, offering users the ability to make trades without anyone knowing who they are. Some platforms, especially decentralized exchanges are not interested in uncovering the identities of traders. Centralized exchanges like Binance and Coinbase need their potential users to fill in their details and submit identity documents before they can carry out a trade.
More governments have started creating regulations that request exchanges operating in their countries to abide by KYC/ AML procedures. With this is in place, some platforms still allow anonymous trading.
Forex is a different tale on its own because the interbank market and forex platforms like eToro require users to upload identification documents and this has to be in place before trading can happen.
How can one trade forex with bitcoin?
Bitcoin can be used by traders to enter the forex market either by depositing the crypto in a trading account or trading it in a pair.
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Deposit method
Some forex platforms like FXTM and Vantage FX have added an option that allows their clients to fund their trading account with Bitcoin. Instead of funding with fiat currencies, these platforms have made it easy for crypto holders to use their Bitcoin in this area.
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Trading as a pair
This means trading BTC as one part of a currency pair, while the other part is a fiat currency. At the moment, this is only theoretical because of the level of volatility of Bitcoin, as well as its limited maximum volume of supply.
Does Exchange Rate Affect Crypto Value?
A study from the international journal of scientific & technology research showed that the exchange rate has no effect on the value of a cryptocurrency. It doesn’t matter if the value of the USD rises or falls, it won’t affect the value that BTC is traded in an exchange. Like earlier mentioned, the value of BTC is affected by the invisible forces of demand and supply. BTC and other cryptos are not pegged to the dollar or any fiat currencies. Stablecoins are the exceptions to this.
In Conclusion…
- Which is more profitable? With the level of volatility that crypto trading has, some traders have been able to ride the wave to wealth, while others have crashed and burned. The higher the risk, the higher the potential returns and the higher the level of the potential loss.
- Though the forex market may offer some level of stability, it can still be highly volatile. None of them can be said to be better than the other when profitability is concerned. Profitability boils down to the level of research that the potential trader does. A trader that does thorough research has a greater chance of succeeding in either crypto or forex markets.
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